Tuesday, March 2, 2010

Captive Product Pricing

EDIT: I mistakenly believed this example to be and hence called this example "Optional-Product Pricing." However, this is actually a Captive Product Pricing Example! Props to Shogo Okuda for his input from Section G.

Kotler defines optional-product pricing in Ch.9 as “the pricing of optional or accessory products along with the main product.” Essentially, it revolves around the idea that there is going to be a base price for the main piece of product/service, with optional adds on at a certain price to go along with the product or service. The example Kotler gave in the beginning of the chapter was with the airline industry – focusing on Ryanair.

With reading Scott Hardy’s post also about optional product pricing and the airline industry and how customers are feeling pinched for their money, I wanted to go off onto my own tangent…

Something VERY SIMILAR to optional product pricing is -- Captive pricing as Kotler defines the term as "setting a price for products that must be used alogn with a main product", in page 272.

If optional product pricing is potentially going to bring dissatisfaction among many customers in the airline industry, is there an example where a similar pricing strategy (captive pricing) is extremely effective? After thinking long and hard, I thought of something that many college kids do every day… --- play video games.

The PS3, one of the premier video game consoles was released in 2006. Now it’s 2010 and with a price drop, it is only $299.99 for the do it all system. With the hefty price tag (although it has gone down from the $599.99 it started at in 2006), it hasn’t stopped many players from buying the ‘add ons.’

Here's the commercial I was looking at.

In my fraternity, going from room to room, PS3’s (and XBOX 360’s even more so) are a staple product that can be found. On top of this, many of them have a lot of the essentials – the video games and controllers. People with the consoles can usually be found with 2-3 controllers and a minimum of 5 video games. This doesn’t seem expensive, but a typical NEW video game retails at $59.99 for both the PS3 and Xbox 360. In addition, controllers range from $29.99 to $39.99 for both system platforms. This means that it would roughly take buying 5 brand new games to equal the price of a PS3 system ($299.99) or buying 4 brand new games to equal the price of an Xbox 360 ($199).

From the number of controllers, to the different video games, to different system maintenance equipment such as inter-coolers, it is evident the cost of the add-ons do add up. However, this doesn’t stop gamers from purchasing.
There aren’t any campaigns against Microsoft or Sony for the cost of games or controllers. People are still purchasing the equipment. Hence, it seems that optional product pricing is perfect for this industry.

The question I would like to propose then is … does it matter what type of good or service it is for a specific pricing strategy to be effective? Does it matter on the type of the customer? Does it matter on the industry?

Francis Legaspi, Section E

1 comment:

  1. I think the pricing strategy works well with the game industry because video games are more of a Captive-product pricing, which is setting a price for products that must be used along with a main product (Kotler p. 272). To use PS3 or any video game console, one "needs" a video game. Hence it would be difficult to compare the optional pricing to the video-game industry...

    Shogo Okuda
    Section G